CURRENTCURRENT DEVELOPMENTSDEVELOPMENTS ININ THETHE DIVISIONDIVISION OFOF CORPORATIONCORPORATION FINANCEFINANCE
National Conference on Current SEC & PCAOB Developments December 12, 2006 DisclaimerDisclaimer
TheThe SecuritiesSecurities andand ExchangeExchange Commission,Commission, asas aa mattermatter ofof policy,policy, disclaimsdisclaims responsibilityresponsibility forfor anyany privateprivate publicationpublication oror statementstatement byby anyany ofof itsits employees.employees. Therefore,Therefore, thethe viewsviews expressedexpressed todaytoday areare ourour own,own, andand dodo notnot necessarilynecessarily reflectreflect thethe viewsviews ofof thethe CommissionCommission oror thethe otherother membersmembers ofof thethe staffstaff ofof thethe Commission.Commission.
2 2 CorporationCorporation FinanceFinance
OverviewOverview
FinancialFinancial ReportingReporting andand DisclosureDisclosure IssuesIssues
3 3 CorporationCorporation FinanceFinance
OVERVIEWOVERVIEW
CraigCraig C.C. OlingerOlinger
4 4 OverviewOverview
ReviewReview StatisticsStatistics FYEFYE SeptemberSeptember 30,30, 20062006
4,4854,485 issuerissuer reviewsreviews (more(more thanthan 1/31/3 ofof issuers)issuers) 630630 IPOs;IPOs; 155155 newnew 3434 ActAct reviewsreviews 26.226.2 daysdays averageaverage timetime forfor initialinitial commentscomments onon registrationregistration statementsstatements
5 5 OverviewOverview
OrganizationalOrganizational DevelopmentsDevelopments •• DCAODCAO •• ADAD OfficesOffices http://www.sec.gov/jobs/jobs_accountants.shtml
6 6 OverviewOverview
ReportingReporting IssuesIssues RevenueRevenue recognitionrecognition ArticleArticle 1111 propro formasformas versusversus forecastsforecasts NonNon--GAAPGAAP incomeincome statementsstatements
7 7 FinancialFinancial ReportingReporting andand DisclosureDisclosure IPOIPO withwith MergerMerger ofof EntitiesEntities underunder CommonCommon ControlControl
FinancialFinancial StatementsStatements
AccountingAccounting IssuesIssues
LeslieLeslie A.A. OvertonOverton
8 8 IPOIPO withwith MergerMerger ofof EntitiesEntities UnderUnder CommonCommon ControlControl –– F/SF/S
FormForm ofof CombinedCombined F/S?F/S? ¾¾ HistoricalHistorical financialfinancial statementsstatements OnlyOnly ifif 1)1) MergerMerger alreadyalready occurred,occurred, OROR 2)2) MergerMerger willwill occuroccur byby IPOIPO effectiveeffective datedate andand willwill bebe accountedaccounted forfor asas aa reorganizationreorganization ofof entitiesentities underunder commoncommon controlcontrol
9 9 IPOIPO withwith MergerMerger ofof EntitiesEntities UnderUnder CommonCommon ControlControl –– F/SF/S
¾¾ChangeChange inin reportingreporting entityentity (SFAS(SFAS 154154 ¶¶23)23)
¾¾ProPro formaforma financialfinancial statementsstatements ProPro formaforma F/SF/S asas ofof && forfor allall periodsperiods presentedpresented inin thethe historicalhistorical F/SF/S 99 AsAs ifif pooling:pooling: Reg.Reg. SS--X,X, RuleRule 1111--02(c)(2)(ii)02(c)(2)(ii)
10 10 IPOIPO withwith MergerMerger ofof EntitiesEntities UnderUnder CommonCommon ControlControl –– F/SF/S
GeneralGeneral rulerule –– propro formaforma adjustmentsadjustments onlyonly toto latestlatest yearyear andand interiminterim periodperiod 99 AcquisitionAcquisition ofof minorityminority interestinterest 99 ChangeChange inin capitalcapital structurestructure 99 OtherOther transactionstransactions
11 11 IPOIPO withwith MergerMerger ofof EntitiesEntities UnderUnder CommonCommon ControlControl –– F/SF/S
WhichWhich F/S?F/S? ¾¾WhoWho isis thethe Parent?Parent? EntityEntity oror individualindividual ControlControl groupgroup (EITF(EITF 0202--5)5)
¾¾PredecessorPredecessor EntityEntity firstfirst acquiredacquired byby parentparent FullFull F/SF/S allall periodsperiods
12 12 IPOIPO withwith MergerMerger ofof EntitiesEntities UnderUnder CommonCommon ControlControl –– F/SF/S
¾¾CombinedCombined F/SF/S OnlyOnly includeinclude combiningcombining entitiesentities fromfrom date(s)date(s) commoncommon controlcontrol obtainedobtained AdjustAdjust periodsperiods included,included, ifif differentdifferent FYEsFYEs oror notnot controlledcontrolled wholewhole periodperiod EliminateEliminate intercompanyintercompany transactions,transactions, items,items, && profitsprofits
13 13 IPOIPO withwith MergerMerger ofof EntitiesEntities UnderUnder CommonCommon ControlControl –– F/SF/S
MayMay retroactivelyretroactively conformconform accountingaccounting policiespolicies (restate(restate F/S)F/S) ReflectReflect equityequity interestsinterests notnot heldheld byby parentparent asas minorityminority interestinterest –– B/SB/S && I/SI/S CapitalCapital structurestructure andand EPSEPS ofof eacheach combiningcombining entityentity onon faceface oror inin notes,notes, unlessunless mergermerger hashas alreadyalready occurredoccurred
14 14 IPOIPO withwith MergerMerger ofof EntitiesEntities UnderUnder CommonCommon ControlControl –– F/SF/S
EPSEPS retroactivelyretroactively restatedrestated allall periodsperiods forfor changechange inin capitalcapital structurestructure 99 ExceptionException -- ifif significantsignificant cashcash distributionsdistributions inin merger,merger, propro formaforma EPSEPS onlyonly forfor latestlatest yearyear andand interiminterim periodperiod
15 15 IPOIPO withwith MergerMerger ofof EntitiesEntities UnderUnder CommonCommon ControlControl –– F/SF/S
¾¾PrePre--acquisitionacquisition F/SF/S –– Reg.Reg. SS--X,X, RuleRule 33--0505 SignificanceSignificance ofof acquisitionacquisition 99 toto combinedcombined entity,entity, ifif mergermerger isis reflectedreflected inin historicalhistorical combinedcombined F/SF/S 99 toto predecessor,predecessor, ifif notnot SABSAB 80?80? 16 16 IPOIPO withwith MergerMerger ofof EntitiesEntities UnderUnder CommonCommon ControlControl –– AccountingAccounting MergerMerger (SFAS(SFAS 141141 ¶¶D11D11--D18)D18) ¾¾HistoricalHistorical basisbasis toto extentextent ofof commoncommon controlcontrol ¾¾CashCash distributionsdistributions ¾¾PurchasePurchase accountingaccounting –– minorityminority interestsinterests IfIf acquiredacquired byby aa parent,parent, subsidiarysubsidiary oror anotheranother affiliateaffiliate (SFAS(SFAS 141141 ¶¶14)14)
17 17 IPOIPO withwith MergerMerger ofof EntitiesEntities UnderUnder CommonCommon ControlControl –– AccountingAccounting
UnlessUnless nonnon--substantivesubstantive (TB(TB 8585--55 Q.2.),Q.2.), oror minorityminority interestinterest doesdoes notnot participateparticipate inin thethe exchangeexchange
¾ IssuerIssuer WhoWho’’ss thethe accountingaccounting acquireracquirer ofof thethe minorityminority interests?interests? ReverseReverse acquisition?acquisition?
18 18 IPOIPO withwith MergerMerger ofof EntitiesEntities UnderUnder CommonCommon ControlControl –– AccountingAccounting
ValuationValuation ofof issuerissuer’’ss sharesshares toto bebe exchangedexchanged inin mergermerger AcquisitionAcquisition ofof minorityminority interestinterest and/orand/or compensationcompensation expenseexpense AtAt whatwhat date?date? ValuationValuation methodology,methodology, andand byby referencereference toto otherother transactionstransactions andand valuationvaluation evidenceevidence
19 19 IPOIPO withwith MergerMerger ofof EntitiesEntities UnderUnder CommonCommon ControlControl –– AccountingAccounting PushPush--downdown AccountingAccounting ¾¾10/30/7910/30/79 AICPAAICPA IssuesIssues Paper,Paper, EITFEITF DD--97,97, SABSAB 5J5J ≥≥95%,95%, pushdownpushdown requiredrequired 80%80%≤≤ andand <95%,<95%, pushdownpushdown optionaloptional AsAs ifif parentparent preparedprepared GAAPGAAP consolidatedconsolidated F/S,F/S, butbut excludedexcluded thethe parentparent’’ss netnet assets,assets, opsops && cashcash flowflow 20 20 IPOIPO withwith MergerMerger ofof EntitiesEntities UnderUnder CommonCommon ControlControl –– AccountingAccounting
¾¾ApplyApply pushdownpushdown inin combinedcombined F/S?F/S? AccountingAccounting acquireracquirer –– parentparent’’ss basisbasis pushedpushed--downdown ifif ≥≥ 95%95% ownedowned OtherOther combiningcombining entitiesentities reflectreflect parentparent’’ss basisbasis (EITF(EITF 9090--5)5) IfIf parentparent isis anan individual,individual, thenthen theirtheir basisbasis toto bebe pushedpushed downdown isis determineddetermined ‘‘asas ifif’’ theythey hadhad preparedprepared GAAPGAAP consolidatedconsolidated F/SF/S
21 21 IPOIPO withwith MergerMerger ofof EntitiesEntities UnderUnder CommonCommon ControlControl –– AccountingAccounting ¾¾WhatWhat ifif aa combiningcombining companycompany isis aa separateseparate SECSEC registrant?registrant? SeparateSeparate historicalhistorical F/SF/S reflectreflect anyany requiredrequired pushdownpushdown ((≥≥95%95% owned)owned) IfIf ownedowned 80%80% toto <95%<95% andand parentparent chosechose notnot toto aapplypply pushpush--downdown –– cancan theythey applyapply pushdownpushdown nownow toto thethe subsidiarysubsidiary’’ss separateseparate F/S?F/S? ParentParent controlcontrol formform ofof ownership?ownership?
22 22 IPOIPO withwith MergerMerger ofof EntitiesEntities UnderUnder CommonCommon ControlControl –– AccountingAccounting
ImpairmentImpairment ¾¾CombinedCombined F/SF/S –– pushedpushed--downdown basis;basis; samesame asas inin parentparent’’ss consolidatedconsolidated F/SF/S ¾¾LongLong--livedlived tangibletangible andand intangibleintangible assetsassets andand goodwillgoodwill (SFAS(SFAS 142142 && 144)144) ¾¾DayDay 22 impairmentimpairment afterafter reorganizationreorganization andand acquisitionacquisition ofof minorityminority interest?interest?
23 23 FinancialFinancial ReportingReporting andand DisclosureDisclosure ItemItem 4.024.02 88--KK IssuesIssues ShellShell CompanyCompany ReportingReporting
LouiseLouise M.M. DorseyDorsey
24 24 ItemItem 4.024.02 88--KK IssuesIssues
ItemItem 4.024.02 RequirementsRequirements Due 4 business days after conclusion reached Timing driven by who has authority to make decision Disclosures in 8-K, rather than 10-Q or 10-K FAQ 1 of FAQs on Form 8-K dated 11/23/04 http://www.sec.gov/divisions/corpfin/form8kfaq.htm
25 25 ItemItem 4.024.02 88--KK IssuesIssues
ItemItem 4.024.02 Requirements:Requirements: 4.02(a)4.02(a) Board, Board Committee or Authorized Officer concludes that previously issued financial statements can no longer be relied upon due to error Disclose: Date of conclusion of non-reliance Identify f/ss and years no longer reliable Brief description of facts underlying conclusion Whether or not Audit Committee, Board or authorized person discussed matters disclosed in 8-K with company’s independent accountant
26 26 ItemItem 4.024.02 88--KK IssuesIssues
ItemItem 4.024.02 Requirements:Requirements: 4.02(b) Independent accountant concludes and advises company to take action to prevent reliance on its previously issued audit or review report Disclose: Date company was advised or notified Identification of f/ss that can no longer be relied upon Brief description of information provided by accountant Whether or not Audit Committee, Board or authorized person discussed matters disclosed in 8-K with company’s independent accountant File aaccountantccountant’s letter as exhibit
27 27 ItemItem 4.024.02 88--KK IssuesIssues
DisclosureDisclosure IssuesIssues Must clearly state that f/ss can no longer be relied upon Avoid unclear underlying reasons for conclusion f/ss or audit report can no longer be relied upon Be as specific as possible
28 28 ItemItem 4.024.02 88--KK IssuesIssues
Disclosure Issues
If multiple misstatements,
Disclose each error clearly and separately
Staff may question adequacy of 8-K disclosures if a later restatement reflects items not disclosed in 8-K
Example Nonreliance relates to one of multiple revenue sources 8-K should specify which revenue source Disclose whether revenues overstated or understated Any reliable range of impact should be disclosed
29 29 ItemItem 4.024.02 88--KK IssuesIssues
TimingTiming IssuesIssues 8-K filed on same date 10-K/10-Q amendment filed
z Restatement unlikely to be completed within 4 days of conclusion regarding nonreliance
z Trigger is nonreliance conclusion, not completion of restatement process Amended 10-K/10-Q filed for restatement very shortly after 8-K
z Normally takes more time for a restatement
30 30 ItemItem 4.024.02 88--KK IssuesIssues
ItemItem 4.024.02 FormForm 88--KK notnot automaticallyautomatically requiredrequired forfor everyevery restatementrestatement SABSAB 9999 analysisanalysis StaffStaff willwill likelylikely questionquestion lacklack ofof 4.024.02 88--KK ifif primaryprimary f/ssf/ss restatedrestated viavia amendedamended 1010--KK oror 1010--QQ SABSAB 9999 analysisanalysis necessarynecessary toto determinedetermine whetherwhether toto filefile ItemItem 4.024.02 FormForm 88--KK
31 31 ItemItem 4.024.02 88--KK IssuesIssues
ImpactImpact onon priorprior 404404 assessmentassessment NoNo ItemItem 4.024.02 88--KK requirementrequirement toto reassessreassess conclusionsconclusions inin priorprior 404404 reportreport byby managementmanagement DiscloseDisclose inin 88--KK anyany materialmaterial weaknessweakness inin ICFRICFR oror DCPDCP knownknown atat timetime ofof filingfiling Due to duty to correct any prior misstatement in reports when known – Rule 12b-20
32 32 ShellShell CompanyCompany ReportingReporting
ShellShell companycompany mergermerger withwith privateprivate OpCoOpCo Item 2.01 and 5.06 8-K due 4 days after merger Form 10/10SB/20-F content PCAOB opinion required - filing considered like an IPO by OpCo But registered firm not required for audit Unlike a non-shell reverse merger where acquiree f/ss may be audited under US GAAS
33 33 ShellShell CompanyCompany ReportingReporting
PostPost--acquisitionacquisition periodicperiodic reportingreporting inin yearyear ofof consummationconsummation Background If acquisition 8-K due or filed within 45 days of Y/E or Q/E, and 8-K did not include latest year end or quarter end f/ss for OpCo Exchange Act Rules 13a-1 and 13a-13 apply
34 34 ShellShell CompanyCompany ReportingReporting
RuleRule 13a13a--11 PostPost--AcquisitionAcquisition ReportingReporting DomesticDomestic CompanyCompany Surviving entity must file info required in an annual report for latest year end of private OpCo No certifications required – Just updating nonissuer f/ss to prevent gap in reporting NOT a special report 3 years f/ss (2 years for S-B) 8-K due within time period for 10-K/10-KSB Normal ’34 Act reporting after that
35 35 ShellShell CompanyCompany ReportingReporting
RuleRule 13a13a--11 PostPost--AcquisitionAcquisition ReportingReporting ForeignForeign PrivatePrivate IssuerIssuer If surviving company files acquisition 20-F within 3 months after Y/E, and Acquisition 20-F did not include latest year-end f/ss for OpCo Must file 20-F/A to include all info required by annual 20-F, including most recent year end 20-F/A due within time period required for annual 20-F (6 months after acquisition 20-F filed) Again, no certifications required
Normal ‘34 Act reporting after that 36 36 ShellShell CompanyCompany ReportingReporting
RuleRule 13a13a--1313 PostPost AcquisitionAcquisition ReportingReporting Domestic Company Surviving entity must file 8-K/A to include info required in a quarterly report Latest quarter and interim period to date with comparative prior year info File 8-K/A to update f/ss within time period for 10-Q/ 10-QSB (45 days after acquisition 8-K filed for non- accelerated filer) Foreign Private Issuer Not required to file 10-Qs, so no interim updating needed
37 37 ShellShell CompanyCompany ReportingReporting
Example: Domestic shell consummates merger on Feb 6, 2006 8-K filed on Feb 10, 2006 Shell and OpCo have 12/31 year end 8-K includes f/ss for 3 years ended 12/31/04 and interim periods ended 9/30/05 and 04 13a-1 requires surviving company to file f/ss for most recent FYE within 90 days of Feb 10, 2006 8-K/A would include audited f/ss for 3 years ended 12/31/05 plus all other info required by 10-K
38 38 FinancialFinancial ReportingReporting andand DisclosureDisclosure AnalysisAnalysis ofof EITFEITF 0000--1919 onon RegisteredRegistered OfferingsOfferings
StephanieStephanie L.L. HunsakerHunsaker
39 39 EITFEITF 0000--1919 andand RegisteredRegistered OfferingsOfferings
EITFEITF 0000--1919 ““AccountingAccounting forfor DerivativeDerivative FinancialFinancial InstrumentsInstruments IndexedIndexed to,to, andand PotentiallyPotentially SettledSettled in,in, aa CompanyCompany’’ss OwnOwn StockStock””
40 40 EITFEITF 0000--1919 andand RegisteredRegistered OfferingsOfferings
Par.Par. 1414 –– 1818 ofof EITFEITF 0000--1919 BasicBasic PremisePremise:: EventsEvents oror actionsactions necessarynecessary toto deliverdeliver registeredregistered sharesshares areare notnot controlledcontrolled byby thethe issuer.issuer. IfIf thethe contractcontract permitspermits netnet--shareshare oror physicalphysical settlementsettlement onlyonly byby deliveringdelivering registeredregistered shares,shares, cashcash settlementsettlement isis assumed.assumed.
41 41 SecuritiesSecurities ActAct ofof 19331933
BasicBasic StatutoryStatutory RequirementRequirement AllAll offersoffers andand salessales ofof securitiessecurities forfor valuevalue mustmust bebe registered,registered, unlessunless thethe offeroffer andand salesale associatedassociated withwith aa particularparticular transactiontransaction isis ““exemptexempt””
42 42 SecuritiesSecurities ActAct ofof 19331933
••SecuritiesSecurities ActAct isis ““transactionaltransactional”” inin naturenature appliesapplies toto offersoffers andand salessales ofof securities,securities, notnot toto thethe securitiessecurities themselvesthemselves
••EvaluationEvaluation ofof whetherwhether thethe exemptionexemption isis availableavailable andand whenwhen thethe exemptionexemption isis neededneeded mustmust bebe donedone forfor bothboth thethe offeroffer asas wellwell asas thethe salesale 43 43 SectionSection 4(2)4(2) ofof thethe SecuritiesSecurities ActAct
AvailableAvailable forfor anan ““offeringoffering byby anan issuerissuer thatthat doesdoes notnot involveinvolve aa publicpublic offeringoffering””
CommonlyCommonly referredreferred toto asas thethe ““privateprivate placementplacement exemptionexemption””
44 44 SectionSection 4(2)4(2) IllustrationIllustration
ExampleExample –– OfferOffer ofof ““UnitsUnits”” ••EachEach UnitUnit consistsconsists ofof 11 shareshare andand 11 warrantwarrant
TheThe issuerissuer isis offering:offering: SharesShares inin thethe unitsunits WarrantsWarrants inin thethe unitsunits SharesShares ofof stockstock underlyingunderlying thethe warrantswarrants
45 45 SectionSection 4(2)4(2) IllustrationIllustration
••WhenWhen thethe salesale ofof shares/warrantsshares/warrants takestakes place,place, thethe investmentinvestment decisiondecision forfor thosethose securitiessecurities isis completecomplete Securities received are “restricted” since they were not issued in a public offering
••OfferingOffering ofof sharesshares underlyingunderlying thethe warrantswarrants isis notnot completecomplete -- willwill continuecontinue forfor termterm ofof warrant,warrant, oror untiluntil exerciseexercise ofof warrantwarrant
46 46 SectionSection 4(2)4(2) IllustrationIllustration
••SinceSince issuerissuer commencedcommenced offeringoffering privatelyprivately –– issuerissuer cancan’’tt filefile aa registrationregistration statementstatement forfor thethe offeringoffering ofof thesethese sharesshares (underlying(underlying thethe warrants)warrants)
Therefore,Therefore, exemptionexemption mustmust bebe foundfound TypicallyTypically thethe samesame exemptionexemption usedused forfor thethe offeroffer ofof thethe shares/warrantsshares/warrants willwill bebe availableavailable
47 47 PublicPublic OfferingOffering ofof WarrantsWarrants
AssumeAssume warrantswarrants soldsold inin ““publicpublic offeringoffering”” TheThe warrantwarrant mustmust bebe registeredregistered forfor sale,sale, alongalong withwith thethe associatedassociated offersoffers andand salessales ofof thethe sharesshares underlyingunderlying thethe warrantwarrant
••SinceSince offeroffer startedstarted ““publiclypublicly””,, issuerissuer willwill notnot bebe laterlater ableable toto useuse 4(2)4(2) exemptionexemption 48 48 InstrumentsInstruments // FeaturesFeatures SubjectSubject toto EITFEITF 0000--1919
••WarrantsWarrants –– assumingassuming notnot withinwithin scopescope ofof SFASSFAS 150150
••ForwardForward contractcontract –– assumingassuming notnot withinwithin thethe scopescope ofof SFASSFAS 150150
49 49 InstrumentsInstruments // FeaturesFeatures SubjectSubject toto EITFEITF 0000--1919
ConvertibleConvertible DebtDebt –– embeddedembedded conversionconversion optionoption evaluatedevaluated forfor bifurcationbifurcation Assuming not within the scope of SFAS 150 and assuming par. 12 of SFAS 133 criteria for bifurcation are met Analyze whether par. 11(a) of SFAS 133 scope exception is met Need to determine whether conversion option is “conventional” – par. 4 of EITF 00-19 and EITF 05-2
50 50 InstrumentsInstruments // FeaturesFeatures SubjectSubject toto EITFEITF 0000--1919
ConvertibleConvertible P/SP/S -- embeddedembedded conversionconversion optionoption evaluatedevaluated forfor bifurcationbifurcation FirstFirst mustmust determinedetermine naturenature ofof hosthost instrumentinstrument –– moremore akinakin toto debtdebt oror equityequity
51 51 InstrumentsInstruments // FeaturesFeatures SubjectSubject toto EITFEITF 0000--1919 ConvertibleConvertible P/S,P/S, contcont’’dd AnalysisAnalysis ofof HostHost –– par.par. 61(l)61(l) ofof SFASSFAS 133133 OtherOther factors:factors: redemptionredemption provisions,provisions, naturenature ofof returnsreturns (stated(stated oror participating,participating, mandatorymandatory oror discretionary),discretionary), votingvoting rights,rights, collateralcollateral requirements,requirements, residualresidual participation,participation, liquidationliquidation preference,preference, creditorcreditor rightsrights JudgmentJudgment isis requiredrequired
52 52 InstrumentsInstruments // FeaturesFeatures SubjectSubject toto EITFEITF 0000--1919 ConvertibleConvertible P/S,P/S, contcont’’dd IfIf moremore akinakin toto debtdebt –– samesame analysisanalysis asas convertibleconvertible debtdebt IfIf moremore akinakin toto equityequity –– bifurcationbifurcation notnot requiredrequired –– looklook toto otherother GAAPGAAP
53 53 EITFEITF 0000--1919 andand RegisteredRegistered OfferingsOfferings
IllustrationsIllustrations ofof Par.Par. 1414--1818 ofof EITFEITF 0000--1919 ••RegisteredRegistered unitunit offeringoffering ••RegisteredRegistered equityequity securitysecurity unitunit ••RegisteredRegistered convertibleconvertible debtdebt // preferredpreferred stockstock
54 54 EITFEITF 0000--1919 andand RegisteredRegistered OfferingsOfferings
RegisteredRegistered UnitUnit OfferingOffering ••SeenSeen frequentlyfrequently inin ““SPACSPAC”” offeringsofferings ••IssuerIssuer willwill bebe obligatedobligated toto deliverdeliver aa currentcurrent prospectusprospectus toto warrantwarrant holdersholders inin connectionconnection withwith anyany exercisesexercises ••FurtherFurther registrationregistration requirementsrequirements stemstem fromfrom thethe separateseparate investmentinvestment decisiondecision beingbeing mademade atat timetime ofof exerciseexercise
55 55 EITFEITF 0000--1919 andand RegisteredRegistered OfferingsOfferings
RegisteredRegistered UnitUnit Offering,Offering, cont’d ••SinceSince obligationobligation toto deliverdeliver registeredregistered sharesshares uponupon exercise,exercise, warrantswarrants wouldwould notnot qualifyqualify forfor equityequity classificationclassification
BUTBUT…………………… CarefullyCarefully evaluateevaluate termsterms ofof contractscontracts 56 56 EITFEITF 0000--1919 andand RegisteredRegistered OfferingsOfferings
RegisteredRegistered UnitUnit Offering,Offering, cont’d ••WarrantWarrant agreementsagreements maymay indicateindicate warrantswarrants areare notnot exercisableexercisable unlessunless aa currentcurrent prospectusprospectus isis availableavailable
••IfIf clearclear languagelanguage thatthat inin nono eventevent willwill registrantregistrant havehave toto netnet cashcash settlesettle thethe warrants,warrants, staffstaff wouldwould notnot objectobject toto equityequity classificationclassification (assuming(assuming otherother criteriacriteria areare met)met)
57 57 EITFEITF 0000--1919 andand RegisteredRegistered OfferingsOfferings
RegisteredRegistered EquityEquity SecuritySecurity UnitsUnits –– consistsconsists ofof debtdebt andand aa forwardforward purchasepurchase contractcontract forfor commoncommon sharesshares ••Co.Co. hashas obligationobligation toto deliverdeliver registeredregistered sharesshares uponupon settlementsettlement ofof forwardforward contractcontract ••SinceSince nono furtherfurther timelytimely filingfiling oror registrationregistration requirements,requirements, shareshare deliverydelivery isis inin issuerissuer’’ss controlcontrol (par.(par. 1818 ofof 0000--19)19)
58 58 EITFEITF 0000--1919 andand RegisteredRegistered OfferingsOfferings
RegisteredRegistered ConvertibleConvertible DebtDebt // PreferredPreferred StockStock WouldWould registerregister bothboth thethe convertibleconvertible instrument,instrument, plusplus sharesshares underlyingunderlying thethe convertibleconvertible instrumentinstrument SectionSection 3(a)(9)3(a)(9) exemptionexemption willwill generallygenerally bebe availableavailable WouldWould qualifyqualify forfor equityequity classificationclassification underunder par.par. 1414--1818 ofof EITFEITF 0000--1919
59 59 ProposedProposed FSPFSP 0000--1919--bb
FSPFSP 0000--1919--bb ““AccountingAccounting forfor RegistrationRegistration PaymentPayment ArrangementsArrangements”” WillWill requirerequire anyany contingentcontingent obligationobligation toto bebe accountedaccounted forfor underunder SFASSFAS 55 andand FINFIN 1414 SeparateSeparate accountingaccounting forfor thethe instrumentsinstruments subjectsubject toto thethe registrationregistration rightsrights agreementagreement (i.e.(i.e. warrants,warrants, convertibleconvertible instruments,instruments, etc)etc)
60 60 ProposedProposed FSPFSP 0000--1919--bb
UntilUntil adoptionadoption ofof FSP,FSP, continuecontinue existingexisting methodologymethodology withwith clearclear disclosuredisclosure ofof accountingaccounting policypolicy
ProposedProposed effectiveeffective datedate –– F/SF/S issuedissued forfor FYFY beginningbeginning afterafter 12/15/0612/15/06 (i.e.(i.e. Q1Q1 20072007 forfor 12/3112/31 FYFY companies)companies)
61 61 FinancialFinancial ReportingReporting andand DisclosureDisclosure
MaterialityMateriality JudgmentsJudgments ¾¾LargeLarge ErrorsErrors ¾¾IndividualIndividual ErrorsErrors andand NettingNetting ¾¾QuartersQuarters
ToddTodd E.E. HardimanHardiman
62 62 MaterialityMateriality JudgmentsJudgments
ParameterParameter NumberNumber OneOne MaterialityMateriality JudgmentsJudgments MustMust ConsiderConsider AllAll RelevantRelevant QuantitativeQuantitative andand QualitativeQualitative FactorsFactors ParameterParameter NumberNumber TwoTwo IfIf YouYou BelieveBelieve YouYou HearHear AnythingAnything ToTo thethe Contrary,Contrary, ReferRefer toto ParameterParameter NumberNumber OneOne
63 63 LargeLarge ErrorsErrors
CanCan AA LargeLarge ErrorError BeBe Immaterial?Immaterial?
64 64 LargeLarge ErrorsErrors
StaffStaff AccountingAccounting BulletinBulletin No.No. 9999 Context = Small Errors Can Be Material Illustrative Qualitative Considerations Relate to Small Errors
IfIf SmallSmall ErrorsErrors CanCan BeBe Material,Material, CanCan LargeLarge ErrorsErrors BeBe Immaterial?Immaterial?
65 65 LargeLarge ErrorsErrors
NotNot SufficientSufficient toto CiteCite AbsenceAbsence ofof SABSAB 9999 IllustrativeIllustrative QualitativeQualitative ConsiderationsConsiderations (Relate(Relate toto SmallSmall Errors)Errors) WhyWhy AreAre MisstatedMisstated F/SF/S Reliable?Reliable?
66 66 LargeLarge ErrorsErrors
Example Break-Even Years? 2001 - $100 million loss 2002 - $50 million loss 2003 - $100,000 income 2004 - $50 million income 2005 - $100 million income Assume $20,000 or 20% error in 2003
67 67 LargeLarge ErrorsErrors
LimitedLimited CircumstancesCircumstances BreakBreak--EvenEven Years?Years? –– CautionCaution
Regularly Generate Small Income – Not Break-Even
Most Recent Year – Hard to Demonstrate
Multi-Period Turnaround
No Clear Trend in Historical Earnings
AlreadyAlready SoldSold DiscontinuedDiscontinued Operation?Operation?
68 68 IndividualIndividual ErrorsErrors andand NettingNetting
CanCan anan IndividualIndividual ErrorError BeBe ImmaterialImmaterial SimplySimply BecauseBecause ofof thethe ExistenceExistence ofof anan OffsettingOffsetting ErrorError ofof EqualEqual Magnitude?Magnitude?
69 69 IndividualIndividual ErrorsErrors andand NettingNetting
Example:Example:
ErrorError 11 –– OverstatesOverstates NetNet IncomeIncome byby 30%30% ErrorError 22 –– UnderstatesUnderstates NetNet IncomeIncome byby 28%28% ErrorError 11 andand ErrorError 22 CombinedCombined –– OverstateOverstate NetNet IncomeIncome byby 2%2%
70 70 IndividualIndividual ErrorsErrors andand NettingNetting
TakeTake AwayAway EvaluateEvaluate ErrorError 11 andand ErrorError 22 IndividuallyIndividually IrrespectiveIrrespective ofof EffectEffect WhenWhen CombinedCombined IfIf ErrorError 11 oror ErrorError 22 isis Material,Material, RestateRestate IfIf IndividualIndividual ErrorError NotNot Material,Material, SeparatelySeparately EvaluateEvaluate CombinedCombined Error.Error. IfIf CombinedCombined ErrorError isis Material,Material, RestateRestate
71 71 QuartersQuarters
RelativeRelative SizeSize ofof thethe ErrorError Error ------= % X Annual periods: X = Annual Amounts Quarterly periods: Should X= Annual Amounts? OR Quarterly Amounts?
72 72 QuartersQuarters
MaterialityMateriality NotNot LimitedLimited toto QuantitativeQuantitative ComparisonsComparisons MustMust AlsoAlso IncludeInclude QualitativeQualitative ConsiderationsConsiderations
73 73 QuartersQuarters
APBAPB OpinionOpinion 28,28, paragraphparagraph 2929 In determining materiality for the purpose of reporting the cumulative effect of an accounting change or correction of an error, amounts should be related to the estimated income for the full fiscal year and also to the effect on the trend of earnings. Changes that are material with respect to an interim period but not material with respect to estimated income for the full fiscal year or to the trend of earnings should be separately disclosed in the interim period.
74 74 QuartersQuarters
APBAPB OpinionOpinion 28,28, paragraphparagraph 2525 (in(in part)part) ....Previously issued financial statements must also be restated for a change in the reporting entity ( see paragraphs 34, 25, of APB Opinion No. 20) and for correction of an error (see paragraphs 36, 37, of APB Opinion No. 20). Previously issued interim financial information should be similarly restated. APB Opinion Nos. 9 and 20 specify the required disclosures.
75 75 QuartersQuarters
76 76 ConclusionConclusion
QuestionsQuestions ? ? ? ? 77 77